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Auction unknowable

With AdWords, businesses bid to place ads on Google's search engine. If a business bids high enough, its ad will appear when someone searches on a particular term or collection of terms. And each time someone clicks on the ad, the business pays Google somewhere south of its bid (until they exhaust their daily budget). But ad spots aren't calculated by bids alone. Google also assigns ads a "quality score", and placement is determined when bids are multiplied by this numerical rating.

What's more, there's a minimum bid — or, as Google now calls it, a "first page bid." If you don't bid the minimum, your ad won't show up on the first page of search results. This is specific to each advertiser, and it's tied to quality.

The system is so complex — and Google's maintains so much control — that it's only natural to ask whether it's really an auction. Yes, advertisers will never pay more than they bid. But if an advertiser wants to maintain a particular ad placement, they're largely at the mercy at Google. AdWords is famous for the so-called "Google Slap", when an advertiser's quality score suddenly drops, forcing much higher bids for the same ad placements.

The situation is further complicated when you consider that Google bids on its own auctions in placing house ads. Santa Clara law professor and noted tech blogger Eric Goldman has called this an "impermissible conflict of interest."

"Google’s positioning as an auction conductor has emerged as a central defense to the increasing antitrust attention being paid to Google’s remarkable share of the search advertising market," Goldman said in a recent blog post detailing Google's house ads. "However, Google’s positioning breaks down when Google buys house ads via AdWords."

When we first asked Preston McAfee about the ins and outs of AdWords, he told us that — just like the rest of the world — he has no way of knowing what Google is doing. And then he immediately brought up a Yahoo! search advertising technique known as "squashing", which we detailed in an earlier story. With squashing, Yahoo! "handicaps" its search auctions. "When someone has a really high ad click probability, they're very hard to beat, so it's not a really competitive auction," McAfee said. "So that they don't just win [every auction], we do squashing. This makes the auction more competitive.

"It's like handicapping. We handicap the people with the high click probability."

According to McAfee, this can increase Yahoo!'s revenues. "The bidders respond by bidding higher. The one who was destined to lose is now back in the race, so they bid higher trying to displace the number one, and the number one is trying to fend them off so they bid higher too.

"We can make the competition a bit more fierce using squashing, even on keywords where there's not much bidding." He would not say how much squashing Yahoo! does, but he did say that this is always changing. Others within the company, including CTO Raymie Stata, told us that squashing must be balanced against Yahoo!'s efforts to make ads relevant and satisfy searchers. Nonetheless, the practice further blurs the lines between auction and non-auction.

Asked if he thinks Google uses something similar to squashing, McAfee reiterated that AdWords is unknowable. But he did say that according to Yahoo!'s research, Google "could use page two to promote a higher bid price," referring to the second page of search results.

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